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The master of the nation’s purse strings in the hot seat

Safadi looks on suspiciously as I ask him about the cartels that rule the country's economy (Photo: Sam Tarling)

Tasked with putting together a national budget, managing a crippling public debt, as well as paying for a bloated public sector rife with patronage and sectarianism, Finance Minister Mohamad Safadi sat down with Executive to assess how he has fared since taking the helm, and to get his outlook for the country in 2012.

EOn what basis are we assuming that gross domestic product growth next year will hit 4 percent in real terms considering the Syrian situation, delayed infrastructure reform, a global economic crisis and the fact that most economists do not agree with your projections?

The assessment is basically that we had, in the first six months of 2011, zero growth and the economic growth took place in the second six months [during which] we are enjoying 4 percent growth up until now. So in 2011, growth will not be more than 2 percent, at best. As such, we forecast that we should have growth of something like 4 percent in 2012, if things do not deteriorate further, based on the situation today. But later, who knows? In the best-case scenario, we are looking at 4 percent.

E Without growth the whole logic behind the budget is thrown off. Why do you not use scenarios to look at growth and inflation?

Whatever scenario we use, in any case we do not wish to increase our deficit. We have an increase in wages that we are looking at that we have to give. So technically, on top of the 2012 proposed budget [spending], we are going to introduce extra expenditure of roughly $650 million, which should be accounted for. Basically we are revisiting the entire budget because we are not going to say that we had a deficit of $4 billion and then say that we are going to increase it by $650 million. The deficit is not going to increase so we have to find the $650 million from different sources. Whether you cut some expenditure and increase some taxation, or you do it all by cutting expenditures… it’s a work in progress.

E If it is not done by January then you will have missed the constitutional deadline, in which case we go another year without a budget…

Not necessarily. We don’t have to go another year without a budget. Yes, it is supposed to be passed in January but even if you pass it a bit late it’s not a catastrophe.

E You are giving yourself more time despite the constitutional deadline?

We are not giving ourselves more time. I know that it is going to take more time in the Council of Ministers and the Parliament. What I am saying is there is an expenditure list, and an income list and a deficit figure. The deficit figure is not open for debate; all the other items are. That’s what we are insisting: that the deficit item is not going to increase.

E You said previously that a minimum wage increase would be approved based on three conditions: first of all that subsidies to the needy would be given out…

I did not say that. What I said was that it should be done.

E Ok. The other two stipulations were that the competition law is passed and that inflation does not eat up the [wage] rise. What measures have we taken to get there?

Yes. Yet the competition law is not passed by parliament.

E So there is no intent to do so? If we want to open the market and allow prices to fall we have to get rid of oligopolies, don’t we?

Yes. Unfortunately, it’s not on the books yet. The law is…

E …Too sensitive?

It’s not too sensitive. It should have been passed. It’s stopping us from joining the WTO [World Trade Organization]. It’s stopping us from really using the law to make sure that there are no cartels. If you look at the structure now — what we call the syndicate of this, or the syndicate of that — it’s basically cartels of this or cartels of that. So basically we need to pass this law, and there is a lot of work being done so it is not passed. We cannot keep on going down the same route we are.

E But as finance minister you can say ‘I won’t accept that it is not passed’ before you sign the minimum wage increase…

Of course I won’t accept that it is not passed. People say that we need the Ministry of Economy and Trade to get involved to check prices and make sure they are not manipulated. But really, the ministry has no legal tools. You can go and say: ‘Ok fine. You are not supposed to raise the prices.’ He [the trader] says: ‘Ok, but what can you do about it?’ There is nothing you can do about it. There is no law. What can you do? Turn your back to him and that’s it.

E But obviously inflation will be affected if you increase the minimum wage and even more if you increase value added tax [VAT] as well. This will make poor people more vulnerable.

This is absolute bull, if I may say that. The effect on the poor will not be more than half a percent, and the safety net that we are working on in the 2012 budget will not only compensate for half a percent, it will compensate by far, far more than anything that a VAT rise will produce.

E But in principle the latest proposals show that the government has an over-reliance on indirect taxes. A progressive income tax would be fairer and probably garner more revenue. How far are we from this on an infrastructure level and in terms of political will?

It is not just a matter of infrastructure; it’s a matter of ethics. It’s a combination of ethics and infrastructure and unfortunately in certain areas we lack both.

E Which one do we lack more?

[Laughs and shrugs shoulders]

E We have seen the public-private partnership [PPP] law proposed ad nauseam as a way to decrease the burden of infrastructure investments on the treasury. Why is there so much resistance to this?

There is a misunderstanding about these things. There is a misunderstanding about privatization, and there is a misunderstanding about PPP, even though countries like Egypt and even Syria have passed it. There are a lot of countries that we have always claimed we are ahead of in our economic thinking, and we find out that, in reality, we are lacking in certain areas. The misunderstanding is, basically, that the private sector is going to create a monopoly. I agree that the private sector always has the tendency to create monopolies if we do not have the laws [to prevent that]. But a partnership between the public and private sector makes sure that the private sector cannot create a monopoly. It’s actually exactly the opposite.

E Since the Egyptians cut off our gas supply, how much of an increase do you anticipate to the Électricité du Liban’s [EDL] subsidy? What was the reason for the cut? And is there a plan to resolve the issue?

A $2.2 billion [increase] this year. What is clear now is that we cannot rely on the Arab gas line. Egypt promised us a good quantity initially, then that was reduced to half, then to a quarter; they gave us that quarter for three to four months and then they stopped it. So basically, we have an empty gas line. Syria was continuing the Arab gas line from Homs all the way up to the Turkish borders and we were happy that we would be connected with Turkey so we could shop for our gas from sources other than Egypt. Unfortunately, with the events that are occurring in Syria they were stopped and we are not sure how long it will be before that gas line is ready to be used.

The idea is to put an LNG [Liquefied Natural Gas] plant in the south and keep the gas line input in the north. So when we have gas from the north it can go all the way to the south, and when we don’t have gas in the north we can actually feed from the south, or a combination of both — whatever makes economic sense. So basically if you look at this it’s the only scenario we can live with, and it’s an expensive one. That is why we have allocated LL255 billion [$170 million] in 2012 to continue the work of extending the gas line from the north to the south. If we increase production of electricity and do not lower the cost of that production it means the deficit is going to increase. It’s going to bite even more.

E You are part of the committee looking at the amendments to the electricity law and have advocated for the Electricity Regulatory Authority (ERA). What prerogatives will the ERA have and what amendments are being discussed?

We are not reinventing the engine but we know that there are things that do not work. Take for example that the law talks about restructuring the whole company [EDL] and unbundling it. Basically, it says, without saying it, that Électricité du Liban has got to do that work themselves. Well, they can hardly do their accounts. So basically it does not allow for anything else to be done. But what is really important today is to allow for the privatizing of management. Once you do that, you can do everything else.

E But the energy minister is worried about the regulator taking over his authority. This is the crux of the issue, is it not?

Yes, but this can be worked out.

E Do you have any specifics on how?

Not yet, but we are meeting and moving forward.

E In the year to come what needs to be done for the economy to recover?

It’s not going to be an easy year. We have to be watchful on every level. We have to make sure that we do not overspend and that we invest as much as possible in improving our infrastructure.